How much does it cost to trade?

How much does it cost to trade

Entering the Forex market can cost very little. The capital required is the amount required by the brokerage for deposit in a margin account. Some brokers allow a minimum account balance (for the margin account) as low as $1 . With leverage the amount of foreign currencies controlled by that minimum account balance can be large. In practical terms, trading with a minimum amount in the margin account can be risky. A small unfavorable change in currency rates can quickly deplete a margin account with a minimum balance.

In practice, the cost of each trade (before any profit or loss), is found in the spread. Since a Forex pair is purchased at the Ask price, and sold at the Bid price, there is a cost of trading that pair, which is the amount of the spread, multiplied by the amount of currency being traded. Normally, there is no commission charged for Forex trading. The cost is limited to the spread. A common spread for major currencies might be 0 pips to 3 pips . With that spread, there is a cost $30.00 for entering and exiting a trade of currencies valued at $100,000.

How Does the Forex Market Work?

Until the 1970’s, and for the previous 100 years, the value of most currencies was tied in some way to the value of gold. In 1944 this “gold standard” was replaced by the Bretton Woods Agreement which valued the United States dollar against gold, and all other currencies against the US dollar. In 1975 that agreement fell apart and a system of floating exchange rates was widely adopted, leading to fluctuations in currency values in an open market-and laying the foundation for foreign exchange speculation.

Today, trading in foreign currencies by speculators usually takes place through a forex broker or dealer, who provides the trading platform to transact forex trades. Such trades occur in currency pairs, such as USD/JPY (United States Dollars/Japanese Yen). Note that two currencies are always involved in a forex trade, with one being purchased while the other is being sold.

The forex trader will generally hold the purchased currency (called a position) for a period of time, intending to profit when the prices of the two currencies change favorably. The transaction is completed, or the position is closed, when the opposite currency is bought and the other sold. Profit is calculated by the difference in the buying and selling price.

Different brokers offer different services, and traders need to be careful their broker is serving their best interests. Each broker provides demonstration or practice accounts, where a new trader can play with virtual money until they feel comfortable opening a real account. Analysis can be completed and orders are placed online, at the trader’s request.